The Reality: An Economy Runs on HOPE

While reading a report today on the current economic "meltdown" going on in overseas markets, I came across this paraphrase of George Soros.

Billionaire investor George Soros said he believed the United States was already experiencing the pain of a double dip recession and that Republican opposition to Obama's fiscal stimulus plans was to blame for sluggish growth.

Of course, Mr. Soros's actual words were far more nuanced. But this reflects the current reality of politics - both sides are more interested in blame than giving the electorate a clear view of their choices.

So, let me give it a try. I add the disclaimer that I am NOT an economist, and I am sure many economists would ridicule my explanation as overly simplistic. You judge for yourselves.

Everyone agrees we are in the middle of a bad situation. To use a fairly standard analogy, the economy is on fire.
--> Democrats want to beat the fire by spending more. They want to use borrowed money to build the economy faster than the fire can destroy it.
--> Republicans want to beat the fire by spending less. They want to fix the underlying causes of the fire right away, trusting the fire to go out on its own, which will eventually allow new building to resume safely in the future.

But both sides are dismissive of the opposition:
--> Democrats say the Republican plan is like revising building codes in the middle of a fire - it does nothing for those suffering NOW.
--> Republicans say the Democratic plan is like adding fuel to the fire while it is still burning - it may make it harder to see in the short-term, but in the long term it just makes the fire worse.

The problem is, a "fire" is a bad analogy for analyzing the Economy. A fire attacks concrete things, destroying them, requiring people to grow new trees, mine new steel, and use human labor to put it all back together. The Economy, on the other hand, is a more nebulous concept. Value is something which exists in the mind of a human being, based on some "real" factors (like supply and demand) but also based on intangible factors (like desire and status). Value can be created from nothing - consider what you are buying when you buy a baseball card or purchase a Netflix subscription - and can be destroyed without anything concrete having been destroyed (as when a writer is found guilty of plagiarism or fraud). The economy is not built on debt or savings, but rather on HOPE.

Look at it this way.
--> If you have HOPE to have a family, you'll buy a house for them. If you have no hope, why bother?
--> If you have HOPE that you'll have a job tomorrow, you'll take the time to buy more than the essentials. If not, you'll hoard what you have.
--> If you have HOPE to eventually become employed, you'll invest time, money, effort in education. If not, you'll look for ways to pass the time.
--> If you have HOPE that you'll be repaid, you'll extend a loan. If not, you'll keep the money to yourself and invest in treasury bonds.

So, do Democrats or Republicans have the right solution? Neither. Both. It is not a question of finding the right value for a variable in the equation. It is a matter of convincing people there is HOPE for the future, so they will act, spend, and invest. And at the moment, all the Federal Government has done is convince people to look elsewhere for HOPE.

Keep that in mind this next election season.

Burnout & the Great Recession

My company has become obsessed with efficiency. This is not a bad thing in itself - every company should be looking to cut waste and build on their strengths. But I have noticed we have passed the point of cutting fat, and have begun running our best people harder and harder in order to meet deadlines. This is "efficient" - fewer people doing more work - but the stresses and strains are starting to show. And people are starting to ask the deadly question, "Is this really worth it?" And the obvious answer is "No."

Turns out, the same problem is all over in the Great Recession. As employers are forced to do more with less, and then realize they can exploit employers because there are no other jobs to go do, eventually employers are asking the impossible. And burning out their most valuable resources.

Of course, in the long run this strategy is horrible for business. Losing the expertise of one top-performer means hiring someone new, training them from scratch, and perhaps requiring 5 to 10 years to reach the level of productivity that the lost employee had. But in an economic time when companies are living quarter-to-quarter, there is little incentive to think even a year in advance. Burnout is mortgaging the next decade to pay for luxury in the next month. Sounds a lot like the thinking that got us in the Great Recession in the first place.

Government Shutdown Averted by Last-Second Deal

It is no surprise to me, but a great relief to military families, to see that a government shut-down has been averted by a late-night deal between Congressional Republicans, Congressional Democrats, and President Barack Obama. The deal contains $38 billion in cuts - less than the Republicans wanted, but far more than the Democrats had been hoping for - and sets the stage for an even-more-bitter battle leading up to the 2012 elections.

Although, you have to admit one thing. This has made it clear where each party stands - and even more where the President stands. It leaves a clear choice for voters next year.

The administration largely succeeded in blocking the most controversial policy riders impacting the environment and abortion-rights. But the spending cut is one of the single largest in history, and a preview of what lies ahead when Republicans move their 2012 budget plan next week and fight with Obama over raising the debt ceiling in May and June.

When will we get serious?

All too timely with this story in the news. Cartoon from here.

Too little, too late?

From Townhall.Com. Are we really ready to take a deep breath and do what is needed, when it's hard?

Are extreme tax hikes during a recovery brave or foolish?

CT Governor Dannel Malloy has released his budget and it is a doozy. In an attempt to close the budget gap, he is proposing huge tax increases on nearly everyone and everything.

In one of the largest and most wide-ranging tax increases in Connecticut history, taxes on income, cigarettes, alcohol, gasoline, and estates would all increase under Gov. Dannel P. Malloy's budget proposal to be unveiled Wednesday.

The current 6 percent sales tax would also rise for the first time since the state income tax was created in 1991 - to 6.25 percent...Malloy is also seeking to eliminate the sales-tax free week, which is popular among families as it is held in August for back-to-school shopping. Overall, Malloy is proposing more than 50 different tax changes in a package that would increase taxes by $1.5 billion in the first year and $1.34 billion in the second year.

The taxes are so wide-ranging that they would touch anyone who earns a salary, drives a car, gets a haircut, buys clothing, sleeps in a hotel, takes yoga lessons, pays for a manicure, smokes cigarettes, drinks alcohol or takes a poodle to get a haircut.

I am not sure what to think of the governor at this point. On the one hand, this is a courageous move in the era of the Tea Party. While CT is about as blue as they come, there are plenty of anti-tax protesters ready to come out in force. On the other hand, this seems sure to stifle any nascent economic recovery in the cradle and drive businesses out of the state altogether.

Then again, "brave" and "foolhardy" are not always mutually-exclusive terms. Here's hoping the CT Congress can moderate these terms into something the state can live with. Otherwise, it may be time to think about checking out job opportunities elsewhere.

11% of All U.S. Homes Are Vacant

How bad is the housing market? Bad and getting worse. As of now, 11% of all U.S. homes are empty. Can you imagine how desperate builders and real estate agents must be at this point?

So think about it. Eleven percent of the houses in America are empty. This as builders start to get more bullish, and renting apartments becomes ever more popular. Vacancies in the apartment sector have been falling steadily and dramatically, why? Because we're still recovering emotionally from the toll of the housing crash.

Younger Americans have seen what home ownership has done to their friends and families, and many want no part of it. Credit has become very nearly elitist. Home prices, whatever your particular data provider preference might be, are still falling.

This is not a recipe for a recovering economy.

Different teams, same strategy

From Townhall.Com. And all too true.

Broken Window Theory

When Rudy Giuliani became mayor of New York City, he enacted a number of major reforms based on "Broken Window Theory." An ultra-simplified version of the theory might be summarized as "Small crimes lead to big crimes." A broken window (vandalism) leads to the presence of junkies (since clearly no one is there to fix the window) leads to the presence of drug dealers and mobsters leads to violence on the streets as gangs clash, leads to murder.

Giuliani's work in NYC speaks for itself. After riots in the streets under his predecessor, New York reached historic lows for crime and especially violent crime. And his successor has kept crime low, despite the economic pressures of the Great Recession.

Unfortunately, many communities have apparently not learned the lessons of NYC. In order to meet the budget, they are now openly announcing that reports of "minor" crimes will be ignored, as the police force focuses on "major" or "violent" crimes. If "Broken Window Theory" is right, we know what to expect afterward. A marked increase in all kinds of crime, which the cash-strapped, under-manned police force will be even less able to handle.

Cutting waste is one thing. But in our quest for austerity, we must remember the essential services that a society exists to provide. Safety and security is at the top of that list.

Housing Prices Lowest in 15 Years

Economics is a fascinating and frustrating "science". Why? Because it all comes down to human perception. Things are worth what we collectively think they are worth. "Intrinsic value" has very little meaning for most things in the modern economy. We're seeing this in the housing market where people are holding off buying not because prices are too high, or mortgages are impossible to get, but because of a collective sense that things are getting worse.

One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out.

"It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers -- and home prices will come down."

Of course, in the middle of the Great Recession, people are also loathe to take on a new, massive 30 year pile of debt. Still, we all know when house prices will turn around. When we collectively decide they should!

Independence Day Fireworks punted by the Great Recession

As the Great Recession drags on and on, more and more municipalities are being caught by the cash crunch. This year, a major casualty of shrinking budgets may be the traditional July 4th fireworks celebration. Towns all over are canceling or getting creative.

"It's becoming harder and harder to justify," she says of the $20,000 event. "The tax dollars only go so far, and it's one of those expendable items."

Other places such as Birmingham, Ala., may scale back the festivities as well unless they can attract more corporate sponsors. The Independence Day celebration in Moorestown, N.J., across the Delaware from Philadelphia, was canceled for the second year in a row. Monterey, Calif., suspended its Fourth of July festivities because of "budget constraints and ongoing safety concerns regarding the Fireworks Display," according to the city's website. Maplewood, Minn., Mayor Will Rossbach told the Pioneer-Press that it no longer made sense to pay about $19,000 for the town's 30-minute fireworks display while struggling to maintain more basic city services.

In another strategy, Morris Plains, N.J., saved its traditional July 4th fireworks display -- and some of its tight budget -- this year by holding it on Saturday, June 26, instead.

It begins - CT has its bond rating cut

My home state is the first, but it won't be the last. Ratings agencies are beginning to cut the bond ratings for the state. This will make it much more expensive to raise funds in the future

Connecticut is preparing to borrow $956 million to close a budget gap in the fiscal year beginning July 1, after borrowing money last year to cover a deficit of $947.6 million. Not good. Fitch has reduced the states credit rating from AA+ to AA.

President Obama's solution the the Oil Spill: More Taxes

There is a truism of government - you don't tax businesses, you tax their customers. Every tax placed on a business is passed along to customers in higher prices. So when a politician both claims "taxpayers will not pay for the BP cleanup" and that it will be paid with by higher taxes, be skeptical. Be very skeptical.

Lawmakers want to increase the current 8-cent-a-barrel tax on oil to make sure there is enough money available to respond to oil spills. At least 6 million gallons of crude have spewed into the Gulf of Mexico since a drilling rig exploded April 20 off the Louisiana coast.

President Barack Obama and congressional leaders have said they expect BP to foot the bill for the cleanup.

"Taxpayers will not pick up the tab," Senate Majority Leader Harry Reid, D-Nev., said Monday.

BP executives told Congress last week they would pay "all legitimate claims" for damages. But the government needs upfront money to respond to spills, as well as money to pay for cleanups when the responsible party is unable to pay, or is unknown. Money spent from the fund can later be recovered from the company responsible for the spill.

It is a good point that funds are needed for immediate work on the current spill. But we should all be aware this will mean higher prices at the pump for all of us. Especially heading into summer. Which will cause people to travel less, and depress the economy even more.

Utah flirts with abolishing Senior Year

We all knew a few of "that type" of student. The ones who worked hard all thru high school and as soon as they were accepted to college, they stopped trying at all. Of course, most of "that type" learned too late that colleges (1) keep an eye on early admissions, and (2) are able to rescind an acceptance if they see grades slacking off. Still, at least one legislator in Utah is exploring the option of eliminating the Senior Year of high school altogether or at least making it optional. But it is not with the good of the students in mind - it is an attempt to close a serious budget gap.

The sudden buzz over the relative value of senior year stems from a recent proposal by state Sen. Chris Buttars that Utah make a dent in its budget gap by eliminating the 12th grade.

The notion quickly gained some traction among supporters who agreed with the Republican's assessment that many seniors frittered away their final year of high school, but faced vehement opposition from other quarters, including in his hometown of West Jordan..."You're looking at these budget gaps where lawmakers have to use everything and anything to try to resolve them," said Todd Haggerty, a policy associate with the National Conference of State Legislatures. "It's left lawmakers with very unpopular decisions."

Are layoffs killing, rather than saving, our companies?

When the Great Recession hit, layoffs were the go-to strategy for most companies. They cut works left and right in an effort to increase efficiency, and dump long-term liabilities Newsweek is running an interesting article summarizing a series of studies on the effects of layoffs on companies, and the results are interesting. For the most part, layoffs lead to less productivity and less profitability for companies.

Layoffs don't even reliably cut costs. That's because when a layoff is announced, several things happen. First, people head for the door—and it is often the best people (who haven't been laid off) who are the most capable of finding alternative work. Second, companies often lose people they didn't want to lose. I had a friend who worked in senior management for a large insurance company. When the company decided to downsize in the face of growing competition in financial services, he took the package—only to be told by the CEO that the company really didn't want to lose him. So, he was "rehired" even as he retained his severance. A few years later, the same thing happened again. One survey by the American Management Association (AMA) revealed that about one third of the companies that had laid people off subsequently rehired some of them as contractors because they still needed their skills.

Another interesting correlation often forgotten by management is that your employees are also your customers. Every employee laid off is an employee no longer able to afford your services. This can lead to a downward spiral as every lost employee cuts demand, which leads to calls for more cuts.

Clearly, we need to rethink the knee-jerk turn to layoffs when the economy goes south. I am hoping no one calls for a legislative solution here. Better it come from the managers themselves. But it may be inevitable.

Teens disrupt Trumbull Mall

Yeah, I admit it. This is only posted because it happened nearby my own location. But it is proof of what happens when you combine high unemployment with rainy weather - teens with nothing to do will find something to occupy themselves. "Idle hands are the devil's tools."

Hundreds of teenagers became embroiled in a melee and were ejected Saturday night from the Westfield Trumbull mall after harassing customers and exhibiting "rowdy and disruptive behavior."

That resulted in a 17-year-old Bridgeport youth being stunned by a town police officer after charging and knocking the officer to the ground outside the mall, police said.

Here's hoping 2010 is a better year for the economy, so these kids can have better things to do with their time.

Christmas Cynicism

Do you believe in political illusions?

From here.

Whack-A-Banker?

Since I work in the financial services field (in Information Technology), it is no surprise to me that there is hostility to banker out there. Even before the Great Recession, bankers were often hated for obscure fees, labyrinthine rules, and a general lack of empathy. (Honestly, most of the banker I have known have been good people who went out of the way for their customers, but this is the perception.) When the crash came, things got even worse since the direct cause blamed was the Mortgage Derivatives market - clearly the fault of financial services management.

Now, one arcade owner is making a mint by taking advantage of anti-banker animosity with a retooled Whack-A-Mole called "Whack-A-Banker". The owner claims it is so popular, he keeps having to replace worn-out mallets.

Is I.T. Responsible for the Economic Crisis?

I work in Information Technology, so I am sharply aware of the dangers inherent in a badly-built set of systems. It is not just the risk of the Blue-Screen of Death that Windows users are familiar with, or the spinning beachball that haunts Apple users. Even a system that never crashes can be a danger to your business if it doesn't get you the info you need, when you need it. A logical question then, is whether better I.T. systems could have prevented the Economic Crash.

This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm.

Of course, it never helps to blame technology for the failings of human nature and human decisions. But poor human decisions about technology can lead to even more poor human decisions. Quality counts.